In November 2023, a jury convicted two corporate executives of conspiracy and failure to report information about defective residential dehumidifiers as required by the Consumer Product Safety Act (CPSA). The jury verdict is groundbreaking because it is the first ever criminal conviction of corporate executives for failure to report under the CPSA. The judge's decision on sentencing for the two defendants likely will put an end to the yearslong series of civil and criminal enforcement actions involving multiple Gree companies relating to the recalled dehumidifiers. The numerous actions over prior years were related to the companies' recalls of multiple dehumidifiers linked to over 450 reported fires and millions of dollars in property damage.
Under the CPSA, manufacturers, importers and distributors of consumer products are required to "immediately" report information that "reasonably supports the conclusion that the product contains a defect which could create a substantial product hazard" or "creates an unreasonable risk of serious injury or death." At the time of Gree's reporting to the Consumer Product Safety Commission (CPSC), the Gree companies were alleged to be aware of hundreds of incidents, more than 100 fires and millions of dollars in property damage – information that the government alleged should have given rise to a reporting obligation far sooner.
Following a recall, in 2016, the Gree companies agreed to pay a $15.45 million civil penalty to settle CPSC staff charges of knowingly violating the CPSA's reporting requirement, using a false UL product certification mark, and making material misrepresentations to the federal government. But that did not end the saga for the Gree companies. In 2021, one Gree company agreed to plead guilty to a felony – knowingly and willfully failing to report to the CPSC – and the other companies entered into a deferred prosecution agreement related to the same charge. The companies' criminal resolution included a $91 million penalty and represented the first corporate criminal enforcement actions ever brought for failure to report a product safety issue as required by the CPSA.
At the same time the corporate prosecution was pending, the Department of Justice (DOJ) also individually indicted Simon Chu and Charley Loh, the former Chief Administrative Officer and Chief Executive Officer, respectively, of one of the companies. The March 2019 indictment, which was sought and filed during the Trump administration, alleged the two executives had received "multiple reports" that the dehumidifiers were "defective, dangerous and could catch fire," but failed to disclose these hazards to the CPSC for at least six months while they continued to sell the defective products – all while allegedly knowing that they were required to report this information. Following a six-day trial in November 2023, a Los Angeles jury found both executives guilty of conspiracy and failure to immediately report required information under the CPSA.
This first-of-its-kind prosecution (and guilty verdict) against corporate officers reflects the CPSC's and DOJ's increasingly aggressive approach to enforcing the CPSA and holding corporate executives accountable for misconduct. Companies making or selling products subject to the CPSA should be mindful of the increased enforcement focus and potential for corporate and individual criminal exposure that, regardless of administration, appears poised to continue.
Read on for more about criminal enforcement under the CPSA.
Reporting requirement under the Consumer Product Safety Act
The CPSA was enacted in 1972 to protect the public from unreasonable risks of injury from consumer products. It imposes an affirmative reporting requirement on manufacturers, importers and distributors of consumer products, which also applies to the directors, officers and agents of those companies. Information must be reported when it "reasonably supports the conclusion that the product contains a defect which could create a substantial product hazard" or "creates an unreasonable risk of serious injury or death." In practice, the CPSC advises, "when in doubt, report." Given the interplay with consumer product safety, Congress purposefully set a tight deadline for this reporting obligation in the CPSA: Such information must be reported "immediately" – meaning "within 24 hours of obtaining reportable information," though CPSC's implementing regulations also allow companies time to conduct a reasonable investigation, not to exceed 10 working days.
Failure to timely report the information required under the CPSA can result in civil penalties, which are currently capped at $120,000 per violation and $17,150,000 for any "related series of violations." With respect to civil penalties, companies may be subject to monetary penalties if they knowingly violate the law, which is not a particularly high bar because "knowledge" includes information that a reasonable company should have had while exercising due care.
The CPSA also provides for criminal penalties – and imprisonment of up to five years – for not only knowing, but also willful, violations (i.e., where a company knew of its legal obligation to report but voluntarily and intentionally chose not to do so). For individual officers or directors of a company, the CPSA provides for criminal penalties for knowing and willful authorization of the violation of law. This provision of the CPSA had never been utilized by the DOJ for the CPSA's Section 15(b) reporting violations before – until now.
The road ahead: increased focus on criminal enforcement
While the CPSC has not historically pursued criminal enforcement for violations of the CPSA, signs point to this being the leading edge of a potential sea change at the Commission. For example, the CPSC's fiscal year 2023 operating plan reflected an intention to review "all" civil penalty cases "for potential criminal referral to the Department of Justice" – a sentiment repeated within the fiscal year 2024 operating plan. And a unanimous and bipartisan contingent of current CPSC commissioners have strongly voiced their intention to place more emphasis on the role of criminal penalties.
Chair Alex Hoehn-Saric, for example, noted that "[f]ailure to report in a timely fashion will result in an investigation and CPSC will pursue significant civil and potentially criminal penalties." Commissioner Richard Trumka also made clear that "this Commission is serious about deterring corporate misconduct using every tool at our disposal, including the appropriate use of civil penalties and, where warranted, criminal referrals." Commissioner Peter Feldman similarly noted in the wake of Chu's and Loh's convictions that "CPSC and its federal partners will use all available tools to keep consumers safe." And finally, Commissioner Mary Boyle stated that "[c]ivil – and potentially criminal – penalties are essential to ensure that the interests of consumers are given their due."
While Gree is the first case involving corporate and individual criminal exposure for a violation of the CPSA, it assuredly will not be the last. The DOJ Consumer Protection Branch, working alongside the U.S. Attorneys' Offices, appears to have the appetite to pursue additional criminal investigations and prosecutions under the CPSA. In fact, Generac Power Systems recently disclosed that in July 2023 it received a grand jury subpoena related to its failure to timely submit a report about defective portable generators. This criminal investigation follows Generac's May 2023 settlement with the CPSC, under which it agreed to pay a civil fine of $15.8 million and implement and maintain a compliance program and certain internal controls to ensure compliance with the CPSA.
As Trumka cautioned last year, "companies should be on notice that the agency will be even more aggressive in the future." And, in the words of DOJ's Arun Rao (Deputy Assistant Attorney General for the Consumer Protection Branch), "holding corporations and those who act on their behalf (such as managers who attempt to conceal potentially dangerous problems from customers ... ) responsible for criminal wrongdoing has been, and remains, an important priority of the department." The writing appears to be on the wall that, where there are indications of a willful violation, CPSC already is and will continue closely scrutinizing a company's behavior through both a lens of civil penalty enforcement and referral to the DOJ for criminal prosecution. Given the CPSC's increased focus on criminal referrals, companies should assess criminal exposure risk as part of regulatory investigations related to potential violations of the CPSA and corporate executives should have it in the back of their mind when acting on recommendations of whether a product safety issue warrants a Section 15(b) report to the CPSC.
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